CRTC’s 2nd pro-consumer decree: 4 reasons not to celebrate (part 1)

“It really boils down to this. How can we compete if we don’t have cost-based input prices!? When incumbents have retail rates that are lower than the CRTC-approved costs and foreign investors run for the hills, you know something smells! We need real cost-based prices so that competition can work. We’ve tried it the other way, and it didn’t work. This has to be the solution.”

— Marc Gaudrault, CEO, TekSavvy (blog post – Oct 26, 2012)

The CRTC has done it again. On October 26, as Bell’s lawyers were just starting to lob hurt feelings about Astral in the direction of Ottawa’s Deciders, the Commission was issuing another pro-consumer decision. That would be Telecom Regulatory Policy CRTC 2012-592: “Confidentiality of information used to establish wholesale service rates.” Bill Sandiford, president of CNOC, the Canadian Network Operators Consortium (which includes TekSavvy), said they were “very pleased” with the decision (Wire Report, paywall).

In a phrase, the Commission has taken away the blank check that allowed the incumbents to hide demand forecasts, service level costs, corporate cost factors and other inputs associated with wholesaling Internet access. Henceforth, the incumbents will have to reveal far more information about the costs of their Internet services than ever before. All in the interests of that noble precept we call transparency. As you can tell from reading the decision, the incumbents hate the idea that mere mortals finally get a chance to peer up their skirts.

Like any organization with gatekeeping power, the incumbents love their secrets. Secrets bolster power; transparency tends to undermine it. In Canada, we have a long history of regulatory proceedings in which the CRTC has made vital decisions without allowing anyone else to scrutinize the cost figures which form the basis for those decisions – and which determine how much new entrants have to pay the incumbents so that they can run their business. As Marc Gaudrault asks above, how can the smaller guys compete when the financials determining their ultimate wholesale costs are kept hidden in a CRTC filing cabinet marked Confidential?

Yes, you should love this decision – especially since the Commission contemplated this kind of action twice in the past but never went through with it. Just don’t expect this new deal to rock your broadband world any time soon.

The backstory

The only way alternative ISPs can offer you their Internet access is by riding on the incumbents’ networks – a regulatory technique known as “non-facilities-based competition” (because the indies don’t own any of the nation’s millions of phone lines and cable-TV connections, aka the facilities). Here in Ontario, that means they’re beholden to Bell and/or Rogers, which own the local loop – or “last mile” – used to carry voice, TV and Internet data to and from your home.

In the dumbed-down diagram above, the local loop is the wire running from each of the cute little bungalows to the local (telco) exchange, what in these parts is usually called the CO or central office. (The diagram should also be showing coaxial cable running from the bungalows to the cable guy’s headend; it constitutes the “other” last-mile wire – neither of which btw is necessarily a mile in length).

The “other licensed operator” in the blue box above may be entitled to connect to the incumbent’s facilities in a number of different ways. (Our diagram shows only a voice connection and not Internet, but the basic idea still holds.) In this depiction the independent is right inside the belly of the beast, leasing floor space and owning at least some of its own switching gear. The three homeowners can, in theory, choose this alternative operator over the incumbent for their Internet access.

Why this setup? Competition. The conventional free-market wisdom has it that competition is good and lack of competition is bad. To promote broadband competition, the CRTC requires that the incumbents do something they would otherwise never dream of: lease their network facilities to new entrants at discounted rates so they can do their best to take the incumbents’ business away. The incumbents deal with that ingratitude by making these leasing relationships as difficult as humanly possible. The engineering isn’t that difficult. It’s the accounting and legal niceties that make this “open access” model a nightmare. But in Canada, it’s all we’ve got to work with. Otherwise, our broadband services would be even worse than they already are.

Why we suck

We got into this mess because long ago the CRTC decided it didn’t need any accepted tests of market concentration (like the Herfindahl–Hirschman Index, HHI) or other empirical evidence to declare broadband was competitive. What they were counting on is “intermodal” competition, the battle between the two main technical platforms, high-speed cable and telco ADSL. That’s why most Canadians have a choice between the devil and the deep blue sea – two incumbents like Rogers or Bell. That’s also why we have some of the highest access prices and worst services in the developed world (for a thorough scholarly discussion of why we have so little competition, see the 2009 Middleton, Van Gorp paper, “How Competitive is the Canadian Residential Broadband Market?“).

Evidence of our suckiness isn’t confined to the usual OECD and Akamai data.

This summer, e.g., the New America Foundation published The Cost of Connectivity: A comparison of high-speed Internet prices in 22 cities worldwide (HTML here, pdf uploaded here). The authors looked at a number of different plans in the 22 cities, one of which is Toronto. Take the costs of triple-play bundles. On page 4 we find a listing of 57 services ranked by cost (in USD with the usual PPP formula). Guess what: Toronto doesn’t even make the list. Number one is the Balti-Com bundle – in Riga, followed by Seoul and Paris, twice each. Verizon New York makes #57 with a bundle costing $154.98.

Turn the page and check out “What can you get for $35?” – meaning in a standalone broadband service. This time Toronto makes #13 out of the list of 22, for a 28/1 DSL connection costing less than $33. Except it’s not from an incumbent; it’s from competitive ISP Acanac. And if that stirs the patriotic cockles, wait till you look at the three winners: Hong Kong, Tokyo and San Francisco for services running at 500/500, 200/200 and 200/200 Mbps respectively. All fiber, of course. One other important detail: if you leave out the US cities, only the Bristol and Dublin entrants have a data cap (with three marked D/K). We’ll get back in the next post to the CRTC’s role in promoting and institutionalizing this handy price-gouging tool in every major market in Canada.

In Part 2 – those 4 reasons not to celebrate. That’s right, we haven’t even got to those yet.